Microeconomics is the learning of decisions that individuals and businesses create concerning the distribution of assets as well as amount supplies plus serve. Its mode as well captivating interested in relation dues plus rules produced with government. It focuses lying on provide as well as account and other forces that establish the price levels seen in the country. For instance, political economy intends seem to be at how a definite company could maximize its production and capability so it might lesser prices and improved competes in business.
On the other hand, it might be the position to finances to study the performance of the market as a entire and not just on definite companies, but whole industries and economy.
Whereas these study of finances materialize in the direction of be dissimilar, they are essentially mutually dependent and complement one an additional because there are numerous overlapping issues among the two fields. For example, improved inflation (macro effect) would cause the worth of raw equipment to enhance for companies and in turn influence the finish goods cost stimulating in the direction of the neighbourhood.
The bottom line is that micro economics obtain a bottoms-up approach to analyzing the economy whilst macroeconomics takes a top-down approach. Regardless, mutually micro- and macroeconomics provide primary tools for any business expert and have to be considered jointly in order to completely recognize how companies activate and make revenues and thus, how an whole economy is managed and persistent.
Connection between the quantity of a service that producer have presented for sale and the quantity that clients are prepared in addition to capable to purchase. Commands rely on the value of the service, the prices of related goods, and consumer’s income and taste. Supply depends not only on the value available for the goods but also on the prices of related goods, the technique of manufacture, in addition to the accessibility and costs of inputs. The intention of the market is to make the same exact and supply all the way through the price development. If buyers would like to obtain additional of a service than is presented on the marketplace, they will be likely towards submission the value up. Condition added of a product be obtainable to buyer concern to pay for, supplier resolve proposal price behind. Hence, at hand is a propensity through an stability value where in the amount demand equals the quantity supplied. The quantify of the responsiveness of supply and order to changes in price is their flexibility.
Market structure on business organisation
In marketing approaches, we virtually ever initiation with several – or as we like to call them, client. To achieve a total market structure, each individual consumer market structures need to be gathered. Individual structures are uncomplicated each consumer’s behaviors and/or understand about key advertise variable(s). If you have kept your eyes open virtually of the time so far, you will not be impressed to learn that two main amalgamate methods are used: behavioral aggregation (linked to studying market impact); subjective aggregation (linked to the extent to which goods can exchange for each other, ratings, ideas, and comprehend).
ANALYSIS OF BUSINESS OBJECTIVES AND BUSINESS BEHAVIOUR IN THE ECONOMIC CONTEXT
Profit maximization be the major plan of several company and consequently it is also an purpose of economic management. Profit maximization, in economic management, represents the development otherwise the move towards by means of income (EPS) of the company are improved. In easy words, all the decisions whether speculation, finance, or payment etc are focused to make the most of the income to best possible levels.
Profit maximization is the established approach and the most important objective of financial managing. It imply that each choice telling to company be evaluate within the beam of income. The entire the assessment with high opinion to original projects, gaining of assets, raising capital, distribute dividends etc are considered for their impact on profits and productivity. If the result of a assessment is supposed to have helpful result on the profits, the conclusion is taken additional for implementation.
Measurement Standard: Profits are the true quantity of practicability of a company model. Without income, the business losses its most important objective and consequently has a straight risk on its continued existence.
Social in addition to trade and industry benefit: The income maximization intention circuitously caters to community wellbeing. Within a industry, income establish competent operation and distribution of property. Reserve distribution in addition to expenses intended for property, labour, principal and business take concern of community plus monetary wellbeing.
Boundaries of Revenue Maximization the same as an purpose of Monetary Administration:
Profit maximization is criticize for some of its boundaries which are discussed below:
Confusion of the concept “Profit”: The term “Profit” is a indistinguishable term. It is because dissimilar mindset will have different awareness about profit. For instance income can be the net profit, gross earnings, previous to income tax revenue, or the rate of revenue etc. Convenient is denial evident definite profit maximization regulation concerning the income.
Ignores Time Value of Money:
The income maximization formula basically suggests “higher the earnings better is the suggestion”. In essence, it is allowing for the exposed profits with no taking into consideration the timing of them. Another important command of finance says “a dollar today is not equivalent to a dollar a year later”. So, the moment value of money is totally ignored.
Ignores the Risk:
A choice exclusively based on profit maximization model would take assessment in support of income. In the detection of income, the risk concerned is uncared for which may establish unreasonable at period basically for the reason that advanced risks straight questions the endurance of a industry.
The mainly difficult aspect of profit maximization as an object is that it ignores the indefinable settlement such as excellence, representation, technological advancements etc. The involvement of indefinable assets in generating worth for a company is not meaning ignoring. They not directly make possessions for the business.
Profit maximization lined the usual company state of mind which has moved out through tough changes. In the current approach of company and financial management, greatly advanced significance is assigned to riches maximization in assessment of revenue Maximization vs. capital Maximization. The loosing consequence of income maximization is not groundless and it is not simply because it ignores positive significant areas such as risk, superiority, and instant value of money but as well because of the advantage of wealth maximization as an intention of business or financial management
AN ANALYSIS OF THE IMPACT OF MARKET STRUCTURE ON BUSINESS ORGANISATIONS
The market, its definition and structure
The compilation of factors that establish how buyers and sellers work together in a marketplace how prices transform, and how different levels of the manufacture and selling processes act together. The four basic types of a market structure contain oligopolies, monopolies, perfect competition, and monopsony (where only one buyer is present in the market).
A market consists of all the customers who obtain a particular kind of good or service. The marketplace may be sub-divided into split segments each of which can be measured to be a divide market in its own right. It is very significant for a company to be capable to describe its marketplace:
1. Therefore to be able to calculate approximately the size of the advertise
2. Consequently to estimate the development of the marketplace
3. In the direction of recognize the competitor in the marketplace
4. Headed for shatter the advertise behind interested in applicable segment
5. In the direction to generate a suitable advertising combine to application towards consumers in the advertise.
There are different types of markets, for example:
Business-to-Business (B2B) markets in which a business customers are other businesses.
Business to Consumer (B2C) markets in which businesses sell to other clients.
A quantity of markets take place in a physical location e.g. a street marketplace, while others might be virtual markets e.g. when persons buy and sell during the means of the Internet.
The volume of the marketplace can be intended in terms of the number of consumers that make up the marketplace, or the worth of sales in the market. A company can then determine its market share in terms of the amount of consumers its sells to, or the complete total value of its sales.
Markets are naturally prepared into segments. Primary segmentation is connecting consumers selling completely dissimilar products. For example, an oil business manufactures a large choice of fuel and lubricants for street, rail, water and air transport and for industry, every single one of them for altered group of clients.
An explanation of the determinants of national income for the relevant country
An explanation of government policies on the economy of that country
An analysis of the impact of the macroeconomic environment of business organisations
AN EXPLANATION OF THE DETERMINANTS OF NATIONAL INCOME FOR THE RELEVANT COUNTRY
The circular flow of profits representation is a theoretical illustration of the economy. It shows the allocation of income inside the market and the relations between the dissimilar sectors in a modern marketplace economy. The five-sector structure is a extra complicated model in similarity to the fundamental, two, three and four segment model. The representation represents an financial system like Australia and divides the economy into five major sectors.
The first sector in the form is the Households sector. This sector refers to all person members in the economy. All persons of an market are customers. Customers be worried with earn an profits for themselves and expenses on supplies and services. Households provide factor of manufacture i.e. property, manual labour, assets and activity and are compensated by means of revenue in the appearance of payment, salary, attention or income by the firm sector.
The next division in the representation is the Firms sector. This subdivision represents all of the industry firm concerned through the manufacture and allocation of goods and services. firm put in to the circular flow as it is in a corporation best consideration to achieve factors of creation and use them to make and sell supplies and services.
The basic form is based on the statement that the market consists of simply the household and Firms sectors. At this point, the representation is exceedingly and rather, unrealistically simplify so the consideration of the previous sector is not present. In this representation, leakage and injections do not exist. It does not take into explanation the centre market, where savings by customers and asset by firm are leakages and injections respectively. It in addition assume that there is no administration sector influencing the economy, meaning customers disburse no monies as business do not accept any benefits nor do customers be given any collective safety payments.
Equilibrium means the situation of a organization when no recognizable transform is taken put or the kinetic energy of hot and cold water are equal stability way to stay balanced or equal.
The concept of an monetary equilibrium is essentially very complex and delicate. The reason to reason is to obtain the result while the agents described in a form complete their procedure of maximizing performance. Determining while that procedure is complete, in the undersized run and in the extended run, is an indefinable objective as succeeding generations of economists rethink the strategies that agents might pursue.
At its simplest, however, we often find and stability at the connection of two or more lines. The explanation is this. Assume line A represents the optimizing behaviour of one combination of agents, and suppose line B represents the optimizing behaviour of another group of agents. Then, the meeting point of lines A and B is the equilibrium where both groups of agents are optimizing.
The typical example is supply and demand. The supply curve shows the amount supplied at a certain price by profit-maximizing firms. The require curve shows the amount demanded at a given value by utility-maximizing customers. The meeting point of the supply curve and the demand curve is the point that maximizes both income and service
Inflation and Deflation
In the world of economics, there are two basic conditions used to explain the value activities of goods and services over time: inflation and deflation. As investors, it’s significant to recognize the impact inflationary or deflationary period can contain on funds too.
In this publication, we’re going to start by defining the two macroeconomic terms inflation and deflation. Next, we’ll talk regarding how these situations are considered by the U.S. Bureau of Labour Statistics. Finally, we’ll briefly illustrate some of the best investment options obtainable to influence these economic states.
Inflation and Deflation Defined
FDIC Insurance Coverage
In economics, there are two ways to illustrate the changes in the prices of goods and services over time:
Inflation: a reliable increase in the price of goods and services over time. At some point in inflationary times, money loses its “buying” or “purchasing” power, and it takes more units of exchange to acquire the equal units of goods or services. Over time, inflation lowers the value of each unit of currency.
Deflation: a reliable reduced in the price of goods and services over time. Throughout deflationary times, money increases in its “buying” or “purchasing” power, and it takes less units of exchange to procure the same units of goods or services. Over time, deflation increases the worth of each unit of exchange.
Economists usually favour a low and stable rate of inflation. The job of keeping inflation below control is assign to the economic establishment at the Federal Reserve. Increases and decreases to the funds supply can be used to regulate the growth of the economy. The levers used to control the money supply contain interest rates, buying and selling of government securities (Open Market Operations), and bank reserve needs.
The relationship between interest rates and inflation is comparatively straightforward. If the economy is increasing too rapidly, the Reserve cans lesser the money supply by raising interest charge. Top interest charge discourages borrowing, which lowers the currency provide. To add to growth, the Reserve can lower significance charge, thus encourage borrowing. The Federal Reserve controls interest rates throughout the Discount Rate, which is the charge that banks be charged once they borrow cash commencing the central diffidence.
Open Market Operations
The centralized formality, next to the middle collection, be able to also systematize the currency supply during the selling and import of administration securities (bonds). When the Central Bank buys securities, it is exchange currency for the security. Hence, when the Central Bank needs on the way to lower price increases, it know how to sell management safeties and reduce the supply of currency. on the other hand, when the Central collection desires to struggle devaluation, it can buy administration securities.
Bank Reserve Requirements
While debatably the most efficient tool the Federal Reserve can use to manage inflation, changing the distance requirement is rarely used by persons in charge of establishing monetary policy. The reserve prerequisite is the currency a bank needs to keep in Federal formality vaults. The requisite is a fixed percentage of the consumer deposits held at each depository organization or bank.
When the Federal Reserve needs to slow behind the economy, they can enhance the detachment requirement, thus declining the supply of money. Equally, when the Central Bank desires to fight deflation, it can reduce the reserve obligation.
When price increases is not in direct, it is expected used for cost to enhance by a number of hundred percent per month. Normally, the word hyperinflation is used once prices enhance in overload of 50% monthly. But these continue a country economic arrangement can disintegrate. That is to say, the country’s money becomes practically insignificant.
Consumer Price Index (CPI): this program monitors quarterly changes in the prices rewarded by urban customers for a “basket” of goods and services. This basket includes food, clothing, shelter, fuels, transport fares, doctor and dental services, and instruction medications. The CPI is used by a wide selection of organizations to regulate wages, rents, and other items affect by adjust in the cost of living.
Producer Price Indexes (PPI): a family of indexes aimed at measuring the vary in the selling prices received by domestic producers of goods and services. At one time, these were known as the Wholesale Price Indexes, and the determine is a good suggestion of the price in the direction of manufacture supplies and services.
Service charge trend (SCT): furthermore deal towards as the nationalized reimbursement analysis, this program publishes periodical indexes that follow employment expenses, in the end rates, salary, salaries, the same as well as the price to provide settlement to employees.
When deflation appeared, the value of product and services are diminishing, thus the main goal for investors throughout these times is to hold cash given that its relation value is rising. Individual move towards to share money additional insertion cash in capital advertise resources or else undersized term treasury bonds.
Life And Health Insurance In Malaysia Economics Essay
INTRODUCTION Bank Negara Malaysia (BNM) took over the supervision of the insurance industry in 1988. The primary reason for the move was to enable an integrated approach in the regulation and supervision of major financial institutions, in view of the growing convergence of crossholdings and integration of interests between banks and insurance companies. The economic environment may have a profound effect on the growth of the insurance industry.
In Malaysia, the performance of the insurance industry in 1998 was affected by an economic downturn. The total and non-life premium income declined by 2.1% and 9.7% respectively whereas the life premium income experienced a lower positive growth rate of 4.6% in 1998 (1997: 13.5%) (BNM, 1999-2000). In line with the sustained economic recovery, the life insurance industry rebounded strongly to register an impressive double-digit premium growth in 1999, soaring well above pre-crisis levels.
The performance of the insurance industry showed an improvement in 1999 following the recovery of the Malaysian economy. The combined premium income of the insurance industry recorded a growth of 8.5% (1998: -2.1%) to reach RM11,829.9 million (1998: RM10,902.9 million). The life sector has been the major contributor accounting for RM7,152.7 million (1998: RM6,217.2 million) or 60.5% of the premium income, while the remaining balance of RM4,677.2 million (1998: RM4,685.7 million) represented premium income generated from the general sector. Premium income of the industry as a proportion of nominal gross national product (GNP) increased to 4.2% in 1999, compared with 4.1% in 1998.
BACKGROUND OF RESEARCH In Malaysia, BNM Annual Report that been issued yearly regularly indicate policies and development of insurance market in Malaysia. to implement policies and measures to prepare the industry for the challenges posed by the new requirements of the new economy and the increasingly more liberalised market environment. Several measures were initiated directed at improving market penetration through the promotion of new life insurance products and in order to do that the process of formulating and identifying strategies need to be done to enhance the marketing channel for life insurance business so that it can achieve the desired penetration level and raking in all the advantages given by positive economic environment. In order to do that, first step that need to be taken is to identify which macroeconomic variables that really positively significant to the demand of life and health insurance market and from there on best formulation and strategies can be initiated to create accurate result on the demand of life and health insurance market. Efforts were also made by Bank Negara Malaysia to enhance the discipline and standards of conduct amongst life insurer in Malaysia.
Problem Statement Statistical data from BNM has shown that due to economic downturn in 1998, the performance of insurance industry in Malaysia reportedly experienced negative growth of -2.1%. Generally, it shows that economic environment may possibly have direct influence on the performance of insurance industry in Malaysia as a whole. The combined premium income of the insurance industry recorded a growth of 8.5% in 1999 following the economic recovery situation.
The life and health sector has been the major contributor accounting for RM7,152.7 million or 60.5% of the premium income, while the remaining balance of RM4,677.2 million represented premium income generated from the general sector. However, despite the vast potential for growth given the relatively low market penetration in Malaysia, domestic premium income to GNP was comparatively lower than that observed in more saturated markets.
This research need to done so that it can specifically identified which macroeconomic variables that really effect the growth of life and health sector in Malaysia in order to ensure that it can contribute clearly to developing pricing strategies to achieve a specific sales target for life and health business. Macroeconomics is the study of the behavior of the overall economy and economic models normally consist of variables such as real GDP, inflation, price and population density. This study attempts to examine the relationship between macroeconomic variable to performance and demand of life and health insurance industry in Malaysia by using the LS analysis to prove that certain key macroeconomic environment may have a profound and significant effect on the growth of the life and health insurance market.
As in the context of Malaysia, few studies has been carried out to seek evidence of the relationship between macroeconomic variables and performance of life insurance industry from Malaysia perspective but various studies comes out with various results as they are using different period of data and did not include health insurance data like this research and also holds different and various macroeconomic variable. Study by Lim and Haberman (2002) indicate major findings of this study that the savings deposits rate and price change in insurance are two important macroeconomic variables associated with the demand for life insurance in Malaysia. Study conducted by Rubayah and Zaidi (2000) indicate that income has a positive relationship with life insurance demand. Life insurance becomes more affordable when income increases. They examine two types of income variable in their study, namely GDP and income per capita. Income per capita is defined as the GDP divided by the size of the population but on the other hand, their finding also show an insignificant positive relationship between inflation rates and the performance of life insurance.
Economists use these type of data and variables to measure the performance of an economy and the focus on macroeconomic variables in this paper are, price of the life and health insurance product, inflation rates, income per capita and population density. This study is to further examined the direct linkage between these economic environments and whether each one of key variables (price of the life and health insurance product, inflation rates, income per capita and population density) has direct influence on the performance of life and health insurance in Malaysia.
Research objective The purpose of this study is to examine the impact of various macroeconomic variables towards performance of life and health insurance market in Malaysia.. The specific aims of this study are:
To determine which various macroeconomic variables that might have influence on the performance of life and health insurance market in Malaysia
To examine the relationship of each macroeconomic variables ie price of the product, income per capita, inflation rates and population density with the performance of life and health insurance market in Malaysia
To identify which macroeconomic variables that influence the performance of life and health insurance in Malaysia the most.
To suggest the most suitable and appropriate strategies that can be used to improve the performance of life and health insurance market in Malaysia by using all the advantages given by positive economic environment
Research Question How to determine which macroeconomic variables that influence the performance of life and health insurance in Malaysia?
Is there any relationship between each macroeconomic variables ie price of the product, income per capita, inflation rates and population density with the performance of life and health insurance market in Malaysia
Which macroeconomic variables that influence the performance of life and health insurance in Malaysia the most?
What are the most suitable strategies that can be suggested to improve the performance of life and health insurance market in Malaysia by using all the advantages given by positive economic environment?
Significance of Research/ Contribution to the body of knowledge There is no unique and integrated theory for life insurance demand. Research on the impact of macroeconomic variables towards performance of life and health insurance industry in Malaysia very scanty at best. Very little (if at all) is understood about the. urgent need for research focusing on the Malaysian industry and the Malaysian economic environment, which is unfamiliar to most readers. Hence, important impetuses for this research are established.
1. The Government This research is important for the government to formulate policies, acts and regulations for the improvement on the best strategies available in a suitable economic environment in order to develop and guide healthy demand on the insurance industry as a whole.
2. The University/ Academician This study will be used for reference and information for the students and academician who learn on insurance area, risk management or other related fields. Students and lecturers can have an extra knowledge on information provided by the researcher.
3. Management team of Life insurer in Malaysia This research is important for the management team Life Office especially if changes or corrective actions are required due to the changes in various economic environments occur in Malaysia or globally. Hopefully, this research can help the management team of Life insurer in Malaysia able to implement and generate new strategies with regard to the suitable current economic environment.
4. General Public Public must know the factors that influence their purchase decision of life and health policy offered in the market. Besides, they also need to be alert and aware on the coverage offered by Life insurer in Malaysia. This research will help them to really identify the needs to buy life and health product and there is also a growing awareness among Malaysians of individual responsibility in financial planning hence it directly will affect the demand of the said industry.
5. The Researcher By completing this research, the researcher has experienced and being exposed to view the economics side on the insurance industry as a whole and specifically on life and health sector which the researcher have never attempt before. It is a researcher attempt to view as a macroeconomists attempt in order to explain the economic side of this sector and to devise policies to improve its performance as economists use different models to examine different issues. Thus, other researcher might need the information to make their research in the future.
CHAPTER 2: LITERATURE REVIEW The performance for insurance is influenced by many factors and economic factors might be one of them. For example, inflation rate, income per capita and price of the product may affect the performance for insurance in a country. A number of studies have examined the effects of macroeconomic factors on the performance for life and health insurance. Among them are the studies conducted by Cargill and Troxel (1979), Babbel (1985), Browne and Kim (1993), Outreville (1996) and Rubayah and Zaidi (2000). The macroeconomic factors investigated in these studies are highlighted and discussed in brief below.
Financial Development. The findings of Outreville (1996) indicate that the level of financial development directly affects the development of life insurance sector. However, the findings are not statistically significant. Two different proxies have been used as a measurement for financial development. The first one is the ratio of quasi-money (M2-M1) to broad money (M2). This is an indicator for the complexity of financial structure. The second one is the broad definition of money (M2). It is an average value over four years. M2 is regarded as an adequate measure for the financial development in developing countries because banking is the predominant sector in the financial market of developing countries.
Income. Lewis (1989), Hakansson (1969), Fischer (1973), Fortune (1973), and Campbell (1980) have shown that the demand for life insurance is positively correlated with income. As income increases, life insurance becomes more affordable. In addition, the need for life insurance increases with income as it protects dependents against the loss of expected future income due to premature death of the wage earner.
According to prior research (Beenstock, Dickinson, and Khajuria (1986), Browne and Kim (1993), Outreville (1996) the ability to pay insurance premium has been argued to be related to the level of income. This is because, when there is an increase of income levels, there follows a need for a financial instrument to absorb the individualâ€™s surplus funds and to enable them to accumulate wealth. This shows the income level significantly affects the demand for life insurance.
Two different measures have been used for disposable personal income in the study of Babbel (1985). The single-year income is used as a proxy for human capital and the three-year moving average income is used as a proxy for permanent income. The income variables are the real amounts of aggregate disposable personal income. The nominal income values are deflated by the yearly average indices of personal consumption expenditure deflator to render the nominal values in constant dollar terms.
. The conclusion from Cargill and Troxel (1979), Babbel (1985), Browne and Kim (1993), Outreville (1996) and Rubayah and Zaidi (2000) verified that life insurance demand has a positive relationship with income. It shows when income increase, it can create more opportunity the life insurance becomes more affordable for people.
In the study of Browne and Kim (1993), disposable personal income refers to the national income. It is defined as when the depreciation (capital consumption) and indirect business taxes have been taken away from GNP. National income is a more accurate measurement of disposable personal income for a country than GNP or GDP because national income is the income earned by the various production factors; it is refer to Browne and Kim (1993). Meanwhile, Outreville (1996) relates the income variable in his study as the real disposable income per capita. GDP is used as the basis for the disposable personal income. The income variable is expressed in linear form and in logarithmic form.
On the other hand, Rubayah and Zaidi (2000) identified GDP and income per capita have been the two types of income variable in their study. Income per capita is defined as the GDP divided by the size of the population. In the initial stage, both the GDP and income per capita are found to have a positive relationship with the demand for life insurance but are not significant. It is only when stepwise regression analysis is applied in the later stage that GDP appears to have a significant positive relationship with the demand for life insurance but income per capita has been aborted. This is because income per capita contains the element of GDP and therefore multicollinearity exists because the two income variables are highly correlated.
Inflation. If income has a positive relationship with demand for life insurance, it is different when Browne and Kim (1993) and Outreville (1996) did their research to find relationship for inflation. From their research, it shows that inflation has a significant negative relationship with life insurance demand. Inflation gives a diminishing effect on the amount of insurance purchased in a country. Consequently, it makes the value of life insurance eroded. As the result, it leads to the situation where insurance become less desirable good. High inflation tends to cause the purchasing of life insurance to be less attractive because of the rising cost of living.
Meanwhile, Cargill and Troxel (1979) and Rubayah and Zaidi (2000) have revealed different result. Their findings are not in line with the findings of Browne and Kim (1993) and Outreville (1996). Measured up to between these two research, it has found Cargill and Troxel (1979) comparatively defined savings model (i.e. the model that takes into account the changes in policy loans besides the changes in life insurance reserves/savings and dividend accumulations) produce a significant result with the expected negative sign for this variable. It shows a week relationship between life insurance savings and price expectation. Meanwhile different with the findings of Rubayah and Zaidi (2000) it shows between inflation rates and the demand for life insurance has a significant positive relationship
An average inflation rate for the last eight years, Browne and Kim (1993) has used an average inflation to represent the expected inflation rate. Meanwhile, Outreville (1996) uses a weighted average of realised price changes over the last five years as a measure of anticipated price change. Therefore, in Cargill and Troxel (1979) the price expectation in the study refers to the percentage changes in the Consumer Price Index (CPI) over a period of 14 months. Moreover, Rubayah and Zaidi (2000) used in the same way apply the CPI as a basis for the anticipated rate of inflation in their study.
A part from the research, in Cargill and Troxel (1979) the price expectation in the study refers to the percentage changes in the Consumer Price Index (CPI) over a period of 14 months based on the data contained in the Livingston Survey that have been revised by Carlson. Similarly, Rubayah and Zaidi (2000) use the CPI as a basis for the anticipated rate of inflation in their study.
Interest Rate. The findings on the relationship between interest rates and the demand for life insurance are questionable.
Cargill and Troxel (1979) examine two kinds of interest rates in their study: the competing yield on other savings products and the return earned by life insurers. The findings on the competing yield are inconsistent. However, the competing yield tends to be negatively related to life insurance savings. A higher interest rate on alternative savings products tends to cause insurance products to become less attractive as a savings instrument. The yield on newly issued AAA utility bonds is used to represent all the competing rates of return on alternative savings products. Cargill and Troxel (1979) include the current and twelve-quarter distributed lag variables of competing yields in their study. The lag variables are included to reflect the delayed reactions of savers towards new information regarding interest rates on savings because changes in interest rates are assumed to produce a lagged response. Likewise, the findings on the return earned by life insurers are mixed. However, the return earned by life insurers is frequently positively related to life insurance savings. Life insurers earning a higher rate of return tend to attract individuals to purchase insurance from them. The yield on industrial bonds placed privately with a representative group of life insurance companies is used as a proxy for the return earned by life insurers. It is the new money rate of return earned by the life insurers, not the average rate of return on the invested funds. Similar to the competing yield, the current and twelve-quarter distributed lags of the return earned by life insurers are included in the models to investigate the immediate and lagged responses of changes in interest rates on life insurance demand.
Outreville (1996) has shown that the demand for life insurance has not determined by the interest rate such as the real interest rate and the lending rate. The real interest rate is obtained by subtracting the anticipated inflation from the current bank discount rate. For the meantime, there are three types of interest rated, which are the personal savings rate, short-term interest and current interest rate has been identified by Rubayah and Zaidi (2000)
The personal savings rate and short-term interest rate are found to influence significantly and negatively the demand for life insurance, despite the fact that the current interest rate is found to have no significant effect on life insurance demand. The personal savings rate refers to the interest rate offered by banks on normal savings, the short-term interest rate refers to the interest rate on three-month Treasury Bills, and the current interest rate refers to the base lending rate on bank borrowings.
Price of Insurance. From Babble (1985) and Browne and Kim (1993), the findings reported with respect to the effect of price on the demand for life insurance are consistent in the both studies. The price of insurance is significantly and inversely related to the demand for life insurance. A high insurance cost tends to discourage the purchasing of life insurance.
The various insurance price indices in the study of Babbel (1985) are the net present cost per 1000 present-valued unit of insurance expected to be in force over any arbitrary time horizon selected based on the published policy values for a male of age 35. Specifically, the price index refers to the ratio of the present value of expected premium cost, net of dividends and accumulations of cash values, per 1000 present-valued unit of indemnification benefits expected to be received, in excess of the actuarially fair cost. Two different discount rates, namely the yields of 10-year prime grade municipal bonds and double-A-rated corporate bonds, are used to discount the expected future cash flows from the policies.
Browne and Kim (1993) use the policy loading charge as the price measure. It is the ratio of the life insurance premiums to the amount of insurance in force. In fact, it is the cost per dollar of life insurance coverage.
Theoretical Framework INDEPENDENT VIARABLES (IV)
Income per Capita
Performance of Life and Health Insurance in Malaysia
Price of the Product DEPENDENT VARIABLE (DV)
Figure 1.6.1: Theoretical Framework
Sources: Adapted from Shimp, T.A (2003); Pitta, et. Al. (2006); Rowley, (1998); Ndubisi, N.O., and Chew, (2006)
Hypotheses Ho : Income per Capita is not significantly related with the performance of life and health insurance in Malaysia.
H1 : Income per Capita is significantly related with the performance of life and health insurance in Malaysia.
Ho : Price of the Product is not significantly related with the performance of life and health insurance in Malaysia.
H1 : Price of the Product is significantly related with the performance of life and health insurance in Malaysia.
Ho : Inflation rates is not significantly related with the performance of life and health insurance in Malaysia.
H1 : Inflation rates is significantly related with the performance of life and health insurance in Malaysia.
Ho : Population density is not significantly related with the performance of life and health insurance in Malaysia.
H1 : Population density is significantly related with the performance of life and health insurance in Malaysia.
RESEARCH METHODOLOGY All data in this study are secondary in nature. Secondary data is used in finding the resources for this study. Secondary data are statistic not gathered for the immediate study at hand, but for some other purpose. The data related to the demand for life insurance are obtained from the following annual reports: the Annual Report of the Insurance Commissioner and the Annual Report of the Director General of Insurance.
The researcher has gathered the external information from various types of annual
reports: Monthly Statistical Bulletin, Economic Report, Annual Insurance Report of the Bank Negara Malaysia. Materials obtained online are gathered from the official websites of BNM and Kuala Lumpur Stock Exchange (KLSE). Besides, the sources like books, newspapers, journals and internet that were relevant to the research topic were used. All the sources have been referred throughout the findings and analysis of the research. Researcher will analyze the data gathered to proof the evidence that various macroeconomic factors influenced the growth and performance of life and health insurance in Malaysia.
Scope of the study Basically the scope of this study focuses on the macroeconomic variables ie income per capita, inflation rates, price of the product and population density that effect the performance of life and health insurance in Malaysia. There are lots of other macroeconomic variables that can be contributed to the economic growth of Malaysia but this research shall only involved four key factor as for the remaining balance of variables can be included in the future studies as an extension from this research.The research area for this study is from Malaysia perspective only and the time frame shall be from 1998 to 2008 only.
Data Analysis E Views version 6.0 applications were used by the researcher to analyze the data that have been gathered throughout the research process. The data need to be analyzed in order to obtain accurate answer for the question. The Multiple Regression Model will be used to predict the relationships in the construct. The Regression assumptions with respect to autocorrelation (independent of residual), normality (residual is normally distributed), homoscedasticity of error terms, multicollinearity of independent variables will be verified before making any interpretation of the statistical results.